457 plan

A 457 Deferred Compensation Plan is a supplemental retirement savings program which allows its participants to make contributions on a pre-tax basis.

A 457 Deferred Compensation Plan is a supplemental retirement savings program that allows participants to make contributions on a pre-tax basis. A 457(b) plan is a nonqualified tax-deferred compensation plan that works very much like other retirement plans such as the 403(b) and 401(k). Created in 1978 the name refers to the relevant section [457] in the Internal Revenue Code that governs the plan. Two main types of 457 plans exist: governmental and tax-exempt 457(b) plans.

To participate in 457(b) plan, the organization must be a state or local government or a non-church tax-exempt organization under IRC 501(c). Participants are mostly law enforcement employees and firefighters, although some school employees contribute to this type of plan. Employers or employees through salary reductions contribute up to the IRC 402(g) limit on behalf of participants under the plan.

The tax advantages for participants in a 457(b) plan: • Contributions to a 457(b) plan are tax deferred. • Earnings on the retirement money are tax deferred. • Contribution dollar limits are not reduced by the amounts of contributions to other types of plans, unless they are other 457(b) arrangements. • No 10% penalty tax on early withdrawals.